Biodiversity risk and its pricing in European stock markets

Abstract

This study contributes to the emerging biodiversity finance literature by examining how biodiversity risks are reflected in the pricing of European stock markets and the impact of biodiversity-related policies on this risk premium. Using a panel data set of 4093 European companies from 2019 to 2023, biodiversity risk levels are measured at the company level and integrated into the asset pricing model with a new high-minus- low biodiversity risk factor (HLBR). The Carhart 4-factor style panel regressions on individual companies and decile portfolios sorted by biodiversity risk show that higher biodiversity risks necessitate compensation, leading to higher excess returns. The Difference-in-Difference model results indicate that following the Kunming Declaration and the launch of the TNFD, biodiversity risk pricing increased more steeply for high-risk companies than for low-risk ones. However, heterogeneous effects are observed in quantile portfolios sorted by industry and biodiversity risk level, indicating variability in how biodiversity risks impact returns across different industries.